THINGS IN THE WORLD ARE MOVING AS WE HAVE EXPECTED AND HAVE STATED REPEATEDLY IN THESE LETTERS.
LET’S REVIEW THE FACTS AS THEY ARE TODAY.
- Recession is here…in the U.S. and Europe.
- Banks and investment banks are broke and need new capital, and are seeking it from sovereign wealth funds.
- The U.S. and European economies are de-leveraging. Credit is very hard to obtain as banks repair their balance sheets.
- Central banks are getting close to panicking…they realize that they must do more to solve the credit squeeze problem. Capital is not flowing properly and some markets are seizing up. Interest rate declines alone will not solve the problem.
The credit squeeze and market de-leveraging are as broad and deep as it can be imagined. If not handled fast and authoritatively, it’s on its way to creating a new depression that will be one for the history books. It is the result of three factors:
1. Deregulation had led to securitization and derivative creation. By 2006, 75% of all lending was outside of the traditional banking system, and out of the purview of regulators.
2. Securitizing debt assets (that may have been originated by someone else) and selling them to investors left the borrowers and ultimate lenders (the investors) out of touch with one another, and there was little incentive for the originators to underwrite solid loans. Hence, many fraudulent loans were underwritten, securitized and sold.
3. Banks, especially rating agencies, engaged in a foolish charade. They believed, or pretended to believe, that financial markets could be accurately predicted by mathematical models…not surprisingly, the models turned out to be tragically wrong.
Government agencies must be formed to buy debt and create a liquid market. This idea, first propounded in our letters last autumn, is dawning on the legislators and governmental agencies in the U.S., Europe, and Japan and they must act soon if they expect to see positive results.
The cost of all mortgage problems, including derivatives, is expected to be about $4 trillion. Banks and investment banks will write off $1 trillion and be forced to raise new capital. $3 Trillion must come from government funds. No one else has deep enough balance sheets and the ability to print money.
THE SIDE EFFECTS:
Taxpayers in these countries will still be paying the bill for years to come.
In addition, the likely election of a Democratic Congress in the U.S. may open the door for a slew of lawsuits against business, especially Wall Street. This could plague Wall Street profits for years to come.
LET US REVISIT SOME PROBABLE INVESTMENT RESULTS FOR THE NEXT 2 OR 3 YEARS (IN OUR OPINION).
• Inflation will take root in the developed and developing world, and a huge amount of economic dislocation will result.
• Inflation resurges, hurting bondholders.
• The U.S. dollar will go lower.
• Financial stocks could stay under pressure for years.
• Gold, food, base metals, and other commodities will rise substantially.
• The average U.S. and European resident will becomes relatively poorer as the wealth of the U.S. and Europe is transferred abroad in exchange for the capital and commodities needed to run their economies.
The movie of the 1970’s is being rerun with some changes in the script. Our investment strategy remains the same…position the investment portfolios so that they will continue to benefit from the rising prices of gold, platinum, iron ore, steel, other metals, energy, and agriculture products. Own investments that will benefit from the rapid economic growth in India, China, and other developing economies, and from the growing use of alternative energy throughout much of the developing world.
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